Prestige Consumer Healthcare Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2021; results are compared with the quarter ended December 31, 2020. The filing also reports year-to-date results for the nine months ended December 31, 2021. Amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Total revenue | $274.5 million, up 14.9% | $819.9 million, up 16.2% |
| Gross profit / margin | $155.1 million / 56.5%, versus 58.2% | $471.8 million / 57.5%, versus 58.2% |
| Operating income | $82.6 million, up 12.5% | $252.5 million, up 11.5% |
| Net income | $50.2 million, versus $40.9 million | $153.3 million, versus $129.2 million |
| Diluted EPS | $0.99, versus $0.81 | $3.02, versus $2.55 |
| Operating cash flow | Not reported separately for the quarter | $196.8 million, versus $176.5 million |
| Capital expenditures | Not reported separately for the quarter | $6.5 million, versus $17.3 million |
For the quarter, interest expense was $16.9 million, down from $20.1 million; for the nine months it was $48.3 million, down from $63.3 million. The nine-month results included a $2.1 million loss on debt extinguishment. The effective tax rate was 23.9% for the nine months, compared with 21.1% a year earlier.
Liquidity, debt and capital
- Cash and cash equivalents were $21.0 million at December 31, 2021, down $11.3 million from March 31, 2021. Current assets were $275.3 million and current liabilities were $135.1 million.
- Gross debt principal was $1.55 billion; debt net of unamortized costs was $1.53 billion. The debt comprised $600 million of 3.750% notes due 2031, $400 million of 5.125% notes due 2028, and $550 million of variable-rate term loans due 2028.
- The ABL revolver had no balance outstanding and $115.8 million of available borrowing capacity. The company reported compliance with applicable debt covenants and expected to remain compliant over the next 12 months.
- Management said operating cash flow and existing credit facilities should fund working capital and capital expenditures for the next 12 months, excluding acquisitions. No common dividends had been declared or paid through December 31, 2021.
Material changes and management commentary
- Revenue growth reflected stronger demand across most of the portfolio, easing COVID-19 restrictions and increased travel-related demand. North American revenue rose 14.4% in the quarter and 15.2% year to date; international revenue rose 19.3% and 25.3%, respectively.
- Eye and Ear Care and Cough and Cold were notable growth categories. The Eye and Ear Care increase benefited from the acquired TheraTears brand; international growth included increased Hydralyte sales in Australia.
- Gross margin declined year over year, primarily due to higher supply-chain costs; year-to-date margin also reflected $1.6 million of acquired-inventory valuation charges. Management cited supplier cost increases, shipping constraints, product delays and labor shortages.
- Advertising and marketing expense increased to $40.2 million in the quarter and $120.4 million year to date. General and administrative expense rose, reflecting higher compensation and professional fees, including $5.1 million of Akorn acquisition costs year to date.
- On July 1, 2021, the company acquired Akorn’s consumer health assets, including TheraTears, for approximately $228.9 million in cash. The purchase-price allocation remains preliminary. In December, its Australian subsidiary acquired certain territorial rights to Zaditen for $18.0 million.
- The July term-loan refinancing extended the new term-loan maturity to July 2028 and lowered borrowing costs. The company made a voluntary $48.5 million term-loan payment during the quarter; it stated that no further scheduled payment would be due before maturity after payments exceeded required installments.
Risks, contingencies and unusual items
- COVID-19-related uncertainty, labor constraints, supplier and freight cost inflation, and possible supply or distribution interruptions could adversely affect product availability, margins and results. The company said it had not experienced a material overall supply-chain disruption or material pandemic-related negative impact to date.
- Customer concentration is significant: Walmart represented 20.2% of quarterly and 20.9% of nine-month gross revenue; Walgreens represented 10.4% and 10.0%, respectively. The five largest brands accounted for 39.6% of quarterly and 41.7% of nine-month gross revenue.
- The company relies on third-party manufacturers and a third-party distribution provider, and identifies disruption at its primary distribution center or its Lynchburg manufacturing facility as a risk.
- Approximately $350 million of debt carried variable interest rates, with $200 million hedged by an interest-rate swap. A hypothetical 1 percentage-point rate increase was estimated to reduce pre-tax earnings and cash flow by about $2.8 million for the nine-month period.
- Routine legal matters were not expected to have a material adverse effect, taking reserves into account. The U.S. qualified pension plan termination process was underway; approximately $52.1 million of obligations were expected to be distributed, with completion anticipated in the first quarter of fiscal 2023.
- Goodwill and intangible assets totaled approximately $3.28 billion. Management reported no impairment indicators at December 31, 2021, but future changes in sales, margins, competition or valuation assumptions could lead to impairment charges.
Outlook: The filing provides no specific revenue or earnings guidance. Management’s liquidity outlook is conditional on current operations and excludes acquisitions. The company cautioned that results for the nine months are not necessarily indicative of the full fiscal year.
Important facts for investors to verify
- Whether supply-chain, freight and labor cost pressures persist and continue to reduce gross margins.
- Akorn and Zaditen integration, final Akorn purchase-price allocation, and the acquired brands’ contribution to growth and profitability.
- Debt levels, variable-rate exposure, covenant headroom and the company’s capacity to fund acquisitions while maintaining liquidity.
- Customer and brand concentration, and any changes in major retailers’ purchasing or inventory practices.
- Progress and timing of the pension-plan termination and any resulting cash requirements.